How to Integrate Disruptive Technologies in Existing Supplier - - PowerPoint PPT Presentation

How to Integrate Disruptive Technologies in Existing Supplier Contracts

Dan Masur

Partner +1 202 263 3226

dmasur@mayerbrown.com

Linda Rhodes

Partner +1 202 263 3382

lrhodes@mayerbrown.com

June 7, 2016

Daniel A. Masur Partner Dan Masur is the partner-in-charge of our Washington, D.C. office and is recognized as one of the leading lawyers in the outsourcing field by Chambers Global, Chambers USA and Legal 500. He has represented national and international clients in a broad range of on-shore, near-shore, and offshore information technology and business process sourcing transactions involving global and niche sourcing providers, offshore captives and various hybrid structures.

Speakers

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 84

structures. Linda L. Rhodes Partner Linda Rhodes is a partner in the Mayer Brown’s Washington DC office and focuses her practice on complex commercial transactions, including business and technology solutions (e.g., information technology outsourcing, and business process outsourcing), cloud computing and other digital solutions, mergers, acquisitions, divestitures and transition services, joint ventures and corporate governance.

DEFINING THE DEFINING THE OPPORTUNITY:

85

• Incorporating new technologies / solutions / services – e.g., cloud, everything-as-a-

service, autonomics/robotics – to reduce applicable charges, improve performance and/or add new or enhanced capabilities.

• Modifying an existing relationship to incorporate mobility, data analytics and/or
• ther components of the company’s digital strategy by altering the form of service

provisioning.

Defining the Opportunity

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 86

• Directing some or all of the services to digital service providers offering more

attractive pricing, stronger capabilities, new product or service offerings, etc.

• Moving to a different outcome or business construct, such as buying an integrated

unit of consumption that is meaningful to the client’s business, not just discrete devices or other IT components used to perform the function.

Defining the Opportunity (cont’d)

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 87

STRATEGIC AND TACTICAL STRATEGIC AND TACTICAL CONSIDERATIONS:

88

Defining the optimum process, including:

• Timing (not just tied to renewal)

– Driven by business objectives and requirements

• The role of the incumbent provider

– Driven by customer/vendor relationship, demonstrated capabilities in digital arena, willingness to embrace change and willingness to

Process

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 89

in digital arena, willingness to embrace change and willingness to deliver competitive solution without direct competition

• Cost-benefit analysis

– Can be more complicated than traditional transaction – Often involves more than just cost savings – Benefits may include improvement in time to deploy, end user productivity, speed to market, cost of inventory, marketing effectiveness, customer renewal rates, etc.

• Change management considerations

– Requires honesty regarding your organization’s willingness to:

• embrace change
• relinquish control
• accept a vanilla one-to-many solution
• forego customization

Process (cont’d)

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 90

• forego customization
• Creating and maintaining negotiating leverage

– Creating deadlines and a sense of urgency – Maintaining the specter of competition

Identifying and addressing impediments, including:

• Transition charges

– Moving to a digital solution will require transition work, including designing the new solution, developing a detailed transition plan, determining the road map for the migration and migrating the services. – Implementing new tools, including reporting tools and processes, may be necessary.

Impediments

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 91

– Disaster recovery planning for your new digital solution may be required. – The cost associated with these efforts will need to be factored into your business case.

• Termination charges

– Moving to a digital solution may result in a termination of all or part of the existing agreement for convenience or trigger minimum commitments, resulting in continued payment of minimum charges or termination charges. – Working in the context of your existing contract, you may have leverage to negotiate around certain termination charges, but certain termination charges, such as stranded costs, may not be negotiable.

Impediments (cont’d)

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 92

• Availability of internal talent

– New digital technologies may require internal customer staff with different skill sets.

• Mindset/resistance to change

• Stranded costs, including

– Moving to a digital solution may result in stranded equipment. Customer’s equipment is most likely refreshed in cycles, and customer will have equipment that is not at end of life at the time of migration to the cloud solution. – If customer owns the equipment, it has sunk costs. If the provider owns the equipment, then the provider will have stranded costs and want to pass those costs onto customer through termination charges.

Impediments (cont’d)

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 93

– Similarly, there may be third-party maintenance and other contracts to be terminated with termination costs. – Customer may have leased space that is no longer needed for the technology solution. Use of the stranded space should factor into customer’s overall planning.

CASE STUDY: CASE STUDY:

INTEGRATING CLOUD SERVICES IN TRADITIONAL IT INFRASTRUCTURE ENGAGEMENT

94

• Traditional managed service providers – Different approaches to cloud

– Offer cloud-based services (e.g., IBM/Softlayer) – Willing to incorporate third-party cloud provider as subcontractor – Willing to add cloud provider only as managed third party with separate contract

• Value offered by traditional managed service provider

– Separate cloud contract managed directly by client vs. integrating the cloud provider

Role of the Existing Managed Service Provider

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 95

– Separate cloud contract managed directly by client vs. integrating the cloud provider into the existing arrangement as a subcontractor or managed third party – At its most basic, cloud is another means of performing the same functions then being performed by the existing provider – What value does the managed service provider offer and is it worth the cost – If you respond “yes”, then consider …

• Advantages of integrated provider and/or provider-subcontractor models

– Leverage existing contractual commitments/terms – Existing provider responsible for management of entire solution – Integrated performance standards and service levels – Streamlined governance process – one throat to choke – Existing provider identifies and fills gaps and bears gap risks

Role of the Existing Managed Service Provider (cont’d)

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 96

– Existing provider identifies and fills gaps and bears gap risks – Avoid or minimize transition/termination charges and stranded costs

• Disadvantages of integrated provider and/or subcontractor models

– Suboptimal cloud capabilities – Softlayer vs. AWS or Microsoft – Price impact of MSP markup on cloud provider pricing

• Leverage existing contract terms, but recognize required deviations

– Digital services terms are often substantially different from traditional outsourcing terms. – Leveraging your existing provider and existing contract by placing the burden on the provider to request “deviations” for the digital solution. – Contract deviations only apply to the digital portion of the solution. – Integrating digital capabilities into your deal does not mean the provider gets to

Retrofitting of Existing Contract, Defining Deviations

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 97

– Integrating digital capabilities into your deal does not mean the provider gets to renegotiate the entirety of the deal. – Consider whether you need to include contingencies to the “deviations” to accommodate the digital solution.

• Retrofitting of Existing Contract, Defining Deviations cont’d

Issue Traditional OS Cloud Provider Contingency

Control rights Service Locations per Supplement; no change without customer consent No approval of Service Locations Restrictions on location of customer data continue to apply Approval rights Approval of subcontractors No approval of subcontractors Flow-through of contract terms

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 98

subcontractors subcontractors contract terms required; provider remains responsible Audit rights Right to audit facilities, records No right to audit facilities, records Deliver annual controls audit report on cloud environment Post-termination rights Post-termination rights unless otherwise agreed via the supplement No post-termination rights Continuation of services during disengagement period required

• Seek to avoid or minimize stranded costs by, among other things:

– Aligning the migration to the cloud with equipment refresh to reduce stranded costs and/or termination charges – Aligning migration to the cloud with the expiration of impacted licenses, leases and third-party contracts – Repurposing impacted assets – Shifting financial responsibility for impacted costs to the existing provider as provider

Minimizing Stranded Costs

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 99

– Shifting financial responsibility for impacted costs to the existing provider as provider may have more options than customer for repurposing assets

• Statements of Work

– Remarkably few changes: the services received by customer in large part remain the same, with perhaps additional capabilities – Performing same functions using different platform

• Service Levels

– Integrated service levels: existing provider to assume the risk of gaps, including differences in methodology and exceptions

SOW, SLAs

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 100

Integrated service levels: existing provider to assume the risk of gaps, including differences in methodology and exceptions – Again, remarkably few changes – Treatment of service levels offered by cloud provider – Addition of new service levels covering management

• f cloud provider

• Treatment of cloud provider pricing

– Treat as pass-through of standard cloud pricing

• with negotiated discount and
• without MSP markup

– Pass-through of periodic price reductions (and service level improvements) offered by cloud provider

Pricing

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 101

– Treatment of required price commitments – Define separate MSP management fee, with ARCs/RRCs

• Pricing challenges

– ARC/RRC pricing as the parties ramp down traditional volumes and ramp up cloud volumes

• Addressing fixed component of existing base charges
• Treatment of fixed component of management charges for cloud services

– Treatment of cloud migration costs

Pricing (cont’d)

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 102

QUESTIONS

Dan Masur

Partner +1 202 263 3226

dmasur@mayerbrown.com

Linda Rhodes

Partner +1 202 263 3382

lrhodes@mayerbrown.com

The Age Of Disruption

HOW EMERGING TECHNOLOGIES AND CYBERSECURITY ARE TRANSFORMING SOURCING 103